Fire Insurance Claims - What you need to know

This following is a transcript of an interview with Dave Peterson, a fire insurance expert witness for both the plaintiff and defense and Bob Scott, a partner with the Advocate Law Group who has also practiced law in the insurance industry for over 30 years. For more information about Dave Peterson and Bob Scott, click here.

Dave Peterson: Fire insurance is statutorily mandated by Insurance Code Section 2071 and by that, it means that every fire policy in the State of California has to have what that section mandates. Generally, insurance policies are broken down into four areas. One is the insuring agreement. The second are the definitions. The third would be exclusions, and the fourth would be conditions.

Every fire policy – almost every fire policy – has four areas of coverage.

The first area would be the dwelling.

The second area would be other structures like a detached garage or a gazebo or some guest home or something like that.

The third area is personal property, the property that the insureds would have in the home when the fire took place, and

The fourth would be what they call loss of use or additional living expenses and that coverage helps to pay for the insured to move out and live somewhere else for the period of time it takes to repair the structure and they can move back.

You can get additional coverage by way of endorsements, which might add such important coverages as jewelry or furs because the policies will limit the amount of coverage for jewelry and furs and also for code upgrades. This is a pretty important coverage that insureds should try to get because if the home is destroyed or significantly impaired, sometimes the cities require different construction than it would take to just put it back together as it was before. In that regard, the insurance industry will deny that code upgrade coverage unless there is a specific endorsement providing that coverage. There are some policies that provide that coverage to a limited basis, usually around $10,000, and most of the time, the losses are much more than that. Bob, anything you want to add?

Bob Scott: Yes. Dave did a great job of it; let me just give my perspective. I think one thing that would also be another structure would be a shed. A shed would be a good example, something you would commonly find next to a house in some places. Personal property is pretty straightforward. It’s all your “stuff”. As we pass by these different coverages, it’s important to note that if a family would just take a moment with their video camera and just stand outside the house and shoot the whole outside of the house and then walk through the house and just identify all of their personal property.

Open the closets. Just look inside. Just make, if you would, a very simple 10 to 15 minute video of their house, their property and their other structures. In other words, videotape the home, the other structures and their personal property by just showing the camera around, not too fast, using slow pans and give that to a family member to put someplace else in case your house burns down. That’s probably the best thing one could do to prepare for this other than to learn more about their coverages.

The terms loss of use or additional living expense mean that the insurance company is going to pay for you to live in a like quality residence while they’re redoing your house. In other words, you’ve got to live someplace else because your house has got fire damage. That’s a very important thing that is never explained thoroughly in all the cases that we see.

I think the big picture here is that, including the code upgrades which are very important, really what happens is that the insurer never takes the time to explain to the insured at the front end of a loss, “Here are the different lines of coverage. Here’s how they all work. Here’s what you’re going to get out of it.” They never explain depreciation versus replacement value, or any of these coverages, so the insured knows you don’t have to go to a thrift store or a second-hand store to go buy new clothes.

You can go to any store you want. You shouldn’t go to the downtown Rodeo Drive in Beverly Hills, but you should go to a Nordstrom’s or somewhere else that you would shop and buy clothes that you need and the insurance company will pay you back. They seem to never want to explain to you what rights you have under the policy. They try to limit all under the auspice of saving a buck.

Free Advice: Could you explain replacement value?

Dave Peterson: It used to be that the insurance industry had what they called guaranteed replacement cost. Then the 1994 earthquake hit California and the insurance industry lost a ton of money in providing guaranteed replacement cost. Guaranteed replacement cost meant that the policy might have a limit, I’ll just say of $100,000 for the dwelling, but with the guaranteed replacement cost, that didn’t stop the coverage. The insurance company was obligated to pay to repair the home even if it took more than $100,000, so after the industry lost that great deal of money, almost no insurer in the State of California writes guaranteed replacement coverage anymore.

They reluctantly started writing extended replacement cost coverage and now some of them aren’t even providing that coverage. Replacement cost is the amount that it would take to put the home back into the position it was prior to the fire. Most policies do not require that the insurance company immediately pay that amount. The insurance company can pay what they call “actual cash value”, which may or may not be defined in the policy. If it’s not defined in the policy, then it is the reasonable market value of the home at the time.

It’s a very contentious area in insurance litigation but, generally speaking, actual cash value will be around a 20 percent reduction of the replacement cost value, but the insured can get that money back by simply repairing the dwelling, so it’s what they call in the industry a “holdback”. The industry properly does this. They hold back paying the total amount to be convinced that the insured is going to repair the home and then once the insured repairs the home; they get back the 20 percent. However, there are very bad feelings with insureds and insurance companies over the holdback, the reasonable amount of repair costs and what is actual cash value. It’s highly contentious.

Bob Scott: So let me explain it another way. If the first thing that happens is the insurance company says, “Well, we’re just going to pay you for essentially the 80 percent of what we really know it cost you to go replace that article or item.” Then if you go replace it and give them a receipt, they’ll pay the other 20 percent. But they’ll never tell you that. The only way you’re going to learn it is, I guess, by reading an article like this or finding it out from somebody else that’s been through the process. It’s a good example of a hidden little trick that applies all the way across the board – very important.

Free Advice: Is there a reason why that has never been incorporated into these documents?

Dave Peterson: Well, it’s in the policy. Here’s one thing you should understand. In 1993, the State of California passed some regulations and this really altered the way the insurance industry was to do business in California. They put timelines on it. They put very important duties that the insurance company had to do and one of them is exactly what Bob was talking about. They owe an obligation to fully explain all coverages that are available to the insured for the claim that’s been presented and that is the most often-violated regulation in California by the insurance industry. It’s in almost every claim I see that gets to litigation that I can almost predict that they did not explain all of the coverages that the insured was entitled to get, thereby leaving the insured confused and feeling unprotected after he bought the policy.

Bob Scott: In addition, the carrier tries to shift, in a very cagey way, the responsibility to investigate and work the loss, meaning getting a contractor, getting remediation going, getting all of that. They try to shift that to the insured saying it’s your responsibility to find a contractor. It’s not going to be our contractor. Now, they do that basically for one reason, so that if the contractor screws up, the insurance company is trying to insulate itself from the responsibility of that contractor.

In most cases, I don’t think they can, but it’s critical that the insured (at the beginning of a claim) understands what this risk shifting process is, denies it and writes to the insurance company and says, “I do not have the expertise to know what is and what isn’t a good contractor,” when in fact the insurance companies – every one of them – have a list within their claims department of approved contractors that they use time and again. They’re in this business because there’s a city or county that’s requires permits for rebuilding.

They’re going to require a licensed contractor and they’re going to require certain segments of the work to be done in a certain schedule so that their city inspectors can come review it. All those things are very technical. If studs are placed in a different sequence than they normally should be, it will fail the framing permit, so these are all very important – the plumbing, electrical, and so on. These are things for which the insured would almost never have experience. The closest thing they ever did was buy that portable shed from Sears and bring it home and set it up.

When they now shift that duty, or attempt to, they’re trying to take a huge step back when we look at it globally. They’re trying to take a huge step back from what is really their responsibility, which is to be there to assist the insured, to investigate the loss, determine what the scope of the loss is and then find a contractor who will bid on it.

Dave Peterson: One of the reasons that the insurance companies do this is to build in delays in the claim process so that they can keep their money that much longer and not have to spend it, so by reversing the duty to investigate and putting it on the insured’s back, the insured is busy trying to cope with the loss and, in most cases, there are huge delays by the insured in doing this because they don’t have the experience of dealing with contractors, getting estimates and for getting the scope of the loss. It’s just a subtle ploy by the industry to hold onto their money.

Bob Scott: In addition, the insurance company has now moved you and you’re starting to burn up that additional living expense, so at some point, it’s good for them because they’re going to say, “Oh well, you’ve used up all of your additional living expense,” and at that point, use that as a lever to try to invoke a settlement with you that (a) may be improperly timed, (b) may have improper motive, and (c) they’re trying to use that to save a buck.

Free Advice: What can a consumer do when the insurance company says, “You go out and get the contractors and do all of the legwork”? Should they send a letter? Should they have a record of it and make sure that that doesn’t get lost in the shuffle?

Dave Peterson: Well, in most cases, it’s best to create a paper trail because when you start doing things verbally, the conversation may or may not be memorialized by the insurance company. They’re supposed to memorialize them, but a lot of the phone conversations don’t get memorialized, so that my suggestion would be to write letters to the insurance company because that then becomes part of the claim file and there’s no way that they can wiggle out of it by saying, “Well, I don’t recall” or “I don’t remember,” which is a common answer when you depose these claim people after a loss of that nature.

Bob Scott: I agree with Dave and the other thing that people should do is immediately start their own file. The insurance company is required by state insurance law to start a claim file on your case where all of the important documents and, as Dave suggests, all of the notes of all the phone conversations and everything should be in there. Many times they’re not, so the important thing for you to do is to start your own file and keep a log of what happens – time, date, and person – just as you would if you were memorializing any continuous course of events. Start that log with your notes.

The next thing to do is keep copies of all those letters that you send and all the letters they send you in an orderly fashion so that you keep on top of and look at that file once a week to make sure that it keeps moving. Time is your enemy and time is the friend of the insurance company here. You’ve got to pay attention and force them to move the ball and the best thing to do is to say, “You need to give me the recommendations of those on your approved list that we could use as a contractor,” and you’re just going to have to force them to do that.

Free Advice: These days so many people use email. Would you recommend that because sometimes it’s a record that you can print out, but it’s very easy for the insurance company to say, “No, I never got it” or “It was sent to the wrong person” and isn’t in the claim file?

Bob Scott: My answer is – the squeaky wheel gets the grease, so if you have the capacity to send an email and send it also by regular mail, do both.

Free Advice: Who are public adjusters, where do they fit in and when should they be used?

Dave Peterson: Public adjusters are nothing more than people the insured can hire to interface with the insurance company to get all of the benefits that the insured is entitled to get. They take a percentage of the recovery. I forget what the percentage is, 5 or 10 percent or something like that.

Bob Scott: Oh, sometimes it’s much greater now.

Dave Peterson: Is it?

Bob Scott: Yes.

Dave Peterson: What I have found is that they’re not as up to date on coverages as the insurance industry and there are pros and cons from using public adjusters. It’s hard for me to answer whether it’s good or bad because there are good ones and there are bad ones, but I think that when you have a significant loss, there’s nothing wrong with hiring a public adjuster. Although if you think about it logically, it’s not in your best interest because they take a percentage of what you would normally get from the insurance company as contract benefits and you end up losing that amount.

Bob Scott: I agree with Dave because normally the answer to this is the insurance company should be the one to assist you in the loss. That is their duty. The unfortunate reality is that the public adjusting business has grown, it’s institutional in every city and the reason it’s grown is because the insurance companies have failed to live up to that duty. So it’s much better if you just try to go it alone. I will tell you from a plaintiff’s lawyer’s perspective, I am very, very careful on ever taking a case that had a public adjuster involved in it because usually the thing is somewhat screwed up.

Free Advice: What should a buyer look for when purchasing a fire insurance policy for their home?

Dave Peterson: Probably the most important thing is to make sure that the limit on the dwelling coverage is sufficient to actually replace the home. There’s big litigation going on in this area right now on underinsurance. Many, many, many times the insurance industry sets the limit for the dwelling. Say it’s $100,000, but the actual repair cost that you find out after the loss occurred is $180,000, so right away, the insured has lost $80,000 simply because it relied upon the insurance company to set the policy limit for the dwelling.

That policy limit controls other coverages. It controls the amount of personal property coverage. Usually, it’s a percentage of what the dwelling policy limit is. My suggestion is for an insured to know the square footage of the home and multiply that by $200 to $225 and say that’s the limit that I want.

Bob Scott: Excellent, and the way for homeowners quickly to find out their square footage is to look at the real estate documents associated with the purchase of their house. Many times the square footage of the house is in the listing agreement or in the original listing documents for the sale or in some of the closing documents for the house. You should be able to find it in your file. If not, just talk to your neighbors and find out how big the square footage of their houses is and they should be pretty close to yours and you can get a pretty good walking around approximation. I agree with Dave’s numbers.

Dave Peterson: This is singularly the most important thing that a consumer should do – no doubt. Don’t be underinsured. You might be thinking, “Well, why then wouldn’t the insurance industry want a higher limit? They would get more premiums.” Well, because they need to keep up market share. For them to compete with all the other insurance companies, they need to keep the premiums lower so that they get more customers. It’s a whole complicated area that was supposed to be cured after the Oakland fires.

At that time, the legislature discovered huge underinsured home problems. They passed the disclosure form that the insurance industry had to send out to each insured in the original policies and any subsequent policies that talked about these kinds of things of replacement cost, etc. What has happened is that the insureds become too reliant on agents and the insurance companies for setting those limits and they’re only going to suffer in the end when they have a loss that destroys the home.

Free Advice: What are some of the important aspects of the claim process?

Dave Peterson: The first thing the consumer has to do is give notice to the insurance company. Once that notice is given, then the time requirements start coming into play and they have to start an investigation within 15 days. They have to accept or deny the claim within 40 days. They need to explain all the coverages that are available to the insured so that the insured is intelligent – has enough information to intelligently guide itself during the claim process.

One of the biggest problems for both the insurance industry and the insureds have to do with personal property because the insurance industry requires that the insured prove the contents. I don’t know about you, but I don’t know anybody that has receipts for everything that they have in their home. The problem is that the insurance industry wants to have this proof and it presents a great problem for the insureds. There are some insurers who are reasonable about it, but what I find that most of them are unreasonable about it.

If you have a major fire loss, the insurance company should be hiring a salvage company. The salvage company should be going in there to make a list of everything that’s been destroyed and usually they do a very good job. It’s after that list is made up that you can then present it to the insured and have them fill in the blank spots which are usually when it was purchased and from where it was purchased. However, that whole area of personal property claims is the most contentious, I think, along with the limit issue in insurance litigation over fire losses. Bob, do you have anything to add?

Bob Scott: No. I totally agree. The point being that when you really have the loss and you’re standing there, and many times the policy is burned up with the loss, you’re the last one to know all that you should know about it. It’s the company’s duty to tell you. If they don’t tell you, the first letter you should write is, “Please explain to me in detail how every segment of this coverage operates and how it should operate for me when I go out to look for replacement materials. Please tell me in writing.” In all my experience, I’ve never seen one where the company has done a decent job of explaining that.

Free Advice: What happens when the insured misrepresents something in a claim?

Dave Peterson: This can be very dangerous. The law is that the insurance company can deny the claim in its entirety if the insured misrepresents something during the processing of the claim. What the insureds are going to find when there’s a fire loss is that the insurance company will ask - was it arson? They will generally start an arson investigation and assign the claim to the special investigation unit and have them undertake an investigation. That’s the first effort to not pay the claim.

The second effort to not pay the claim will be to look at the application that the insured filled out to see if they misrepresented anything in the application. That’s effort No. 2 to not pay anything. Effort No. 3 is that they want all this detail in the personal property information. They throw it back on the insured by saying, “You have to fill all this stuff out to get your personal property claim paid,” and so what they’re really doing is hoping that the insured will misrepresent something so that they can glom onto that and deny the claim in its entirety. One misrepresentation is enough.

Bob Scott: Let me give you a good example of how that happens. Your insurance company asks you how many televisions you had in your house and you say five. They send an arson investigator in and they go through the ashes – and I’m talking about a house that has burned to the ground. They go through the ashes with a rake and they find the metal frames of four TVs instead of five. You’re going to lose your entire claim.

It is a distinct threat and so you have to be very careful. Don’t ask for more than you can absolutely confirm. If you have to err, err conservatively on the side of “I’m not sure. I may have had three. I can’t remember if I had two or three.”

Dave Peterson: The reason for that is because some insureds who present a claim puff it. It’s so dangerous.

Free Advice: Do insureds know that insurance investigations involve arson specialists who actually rake up ashes to look for evidence and possibly fraud?

Bob Scott: Well, I’ve seen it many times.

Dave Peterson: Yes and what happens when this happens – when they misrepresent something, jurors do not like that.

Bob Scott: The point is that it’s so easy to cure. Just be conservative and don’t pad the claim. Also, perhaps two of the other most important things we’ve said here are to make sure you get the right amount of square footage to know how much your property is worth and what to do in the claim is to be squeaky clean. And put it in writing.

Dave Peterson: That’s why making a video is very important. For example, I must have about 25 Buddhas in a collection. If my house burns down and I have a video of the Buddhas, the insurance company will ask me what they were worth. Clearly, I don’t know offhand because I’ve been purchasing them for many years and my receipts have burned in the fire. I can tell the insurance company to figure it out by giving them the video.

Many consumers don’t know this, but insurers have facilities that they can use to price these things so you just put the onus back on them, rather than to say, “This Buddha cost $1,000. This one cost $750. This one cost $400 and I bought this in San Francisco ten years ago.” You just open yourself up to claims of insurance fraud. In other words, talk to your insurance agent and agree on the value. Put it on a separate stated segment of your policy that lists all these individual things and lists the value. I would do it with mink coats. I would do it with diamond rings. I would do it with jewelry and I would do it with vases, paintings and fine art – all those things that are expensive, let’s say more than $5,000.00 a piece.

Free Advice: Will you pay an extra premium for that?

Bob Scott: Yes, you’re going to pay an extra premium for all of those things, but now there can be no dispute that it was specifically insured and how much it was insured for.

Free Advice: What should consumers look for when seeking to hire an attorney for a fire insurance matter?

Bob Scott: Well, insurance claims in general have a lot of commonality. The same law applies in all. All of us that do this law really just know that you’ve got to look to the policy and know the little ins and outs of how to handle it. Ask them, “How many of these claims have you handled in the past?” The answer for me would be literally hundreds. That’s the person you want.

It would be just like you were going to have a gall bladder surgery and you said, “Doctor, this isn’t your first gall bladder surgery, is it?” “No.” “How many did you do last year?” “One hundred and fifty.” “How many appendixes?” “Another couple hundred.” That’s the person you want to do the surgery; same answer in this field.

More about Dave Peterson and Bob Scott

Dave Peterson

spent 14 years in the claim industry with Aetna Casualty and Surety. He attended law school at night and since graduation and passing the bar, has been involved mostly in defending insurance companies. He’s authored around 1,500 coverage opinions and has 24 published and unpublished cases that have gone to the appellate courts. He’s defended or been involved with approximately 500 bad faith lawsuits. Today, Peterson acts as an expert for the consumer’s bar and has been involved in over 800 lawsuits where he has been retained as an expert and testified in over 80 trials and arbitration.

Bob Scott is a well-known trial attorney, specializing in all aspects of bad faith insurance litigation. While maintaining the highest standards of professional ethics, he has obtained multi-million dollar judgments, favorable appellate decisions, substantial arbitration awards and out-of-court settlements on behalf of his clients.

Scott’s clients have ranged from individuals victimized by insurance companies, to large banks and industrial companies who recognize the value of having him as their insurance expert to get the best possible deal from insurance companies, and he has been lead counsel in a class action on behalf of defrauded policyholders nationwide. To contact Bob Scott, visit his website at https://www.advocatelawgroup.com.